By Alan Webber
(Co-Founder of Fast Company, Former Editor of Harvard Business Review)
Author: New Rules of Thumb: 50 Ways of Winning at Business Without Losing Yourself
In 1944, the remarkable Austrian-born economic historian Karl Polanyi published The Great Transformation. It is a sophisticated and erudite work and any attempt to summarize Polanyi’s argument (even the summary provided by Joseph Stiglitz) is bound to come up short. But here’s my best effort.
The Industrial Revolution, Polanyi says, ushered in a massive transformation of society and economics. With the Industrial Revolution, markets were invented; land and nature became property, and that meant things that had been valued for themselves now had external economic value. People became labor, and they, too, were transformed from individuals with intrinsic human value into a commodity.
The big transformation, says Polanyi, was that instead of economics serving society, as one component of the way people lived, after the Industrial Revolution society served economics. Economics became the way everyone kept score; it became the ultimate point of the exercise. Along with that came new theories.
One of the most pernicious was the notion of a self-regulating market–that the market needed no external intervention, that it would automatically balance itself and produce its own equilibrium. Polanyi says no. He says that self-regulating markets inevitably fail. That they are a fabrication, a myth. And that when they fail, they bring about so much social pain and disorder that they invariably bring out the opposite of what they promise: they require government intervention to re-balance the social consequences of market failures.
And so, the myth of the self-regulating market produces the very thing it imagines to be unnecessary–government programs and policies to protect society (and particularly the poor) from the ravages of change and economic disaster.
Which brings us to 2011 and Michael Spence. Writing in Foreign Affairs, Spence, a Nobel Prize winning economist, turns to the subject of globalization and unemployment. (My thanks to good friend Peter Sims, terrific author of “Little Bets”, for calling this piece to my attention.)
Again, apologies for oversimplifying an in-depth piece of economic/political analysis. Spence argues with clear logic and data that America’s unemployment problem derives from the increasing globalization of business and work. He divides our economy into tradable and nontradable sectors. The nontradable sector is that part of the US economy where goods and services must be consumed domestically; the tradable part of the US economy is the part that produces goods and services that can be consumed anywhere.
Between 1990 and 2008, Spence says, the US economy created 27 million jobs. Of those, 98% were in the nontradable sector. In that period, the tradable sector grew by a total of 600,000 jobs. The problem: manufacturing has been moving out of the US. Overall, jobs are being produced in the nontradable sector and in the upper end of the tradable sector, in such areas as finance, computer design and engineering, and top management in multi-national corporations.
This leads to an increasing gap between the rich and the poor in the US; it puts enormous stress on the middle class; and it makes education even more important for the country’s economic and social well-being. Free trade and free markets are good, Spence says–just not for everyone. He writes, “Although everyone does benefit from lower-priced goods and services, people also care greatly about the chance to be productively employed and the quality of their work. Declining employment opportunities feel real and immediate; the rise in real incomes brought by lower prices does not. For example, according to recent surveys, a substantial number of Americans believe that their children will have fewer opportunities than they have had.”
Spence is too polite to say it, but what’s he talking about here is the end of the American Dream. But he is quite blunt about who the market benefits and who it punishes: “In short,” he writes, “companies’ private interest (profit) and the public’s interest (employment) do not align perfectly.” What is to be done? One thing, Spence says, is for the US to put more effort into preserving what is left of our manufacturing base. “Specifically,” he says, “the right combination of productivity-enhancing technology and competitive wage levels could keep some manufacturing industries, or at least some value-added pieces of their production chains, in the United States and other advanced countries. But accomplishing this will require more than a decision from the market; it must also involve labor, business, and governments.” What else?
He ends his essay with a section he calls The Big Tradeoff. Instead of benign neglect toward jobs in the tradable sector, he says, the US must come to an agreement that good jobs in this sector is a fundamental national goal. Germany has done just that, he argues, with great success.
Then we need to focus on education: “A lack of commitment to education in families and in communities makes the entire field of education seem unattractive, demoralizing dedicated teachers and turning off talented students from teaching.” We need to invest in infrastructure and in technology that will boost employment in the tradable sector of the economy. We need to fix the tax structure so that it promotes competitiveness, investment, and employment.
“Globalization has redefined the competition for employment and incomes in the United States,” Spence writes. “Tradeoffs will have to be made between the two. Germany clearly chose to protect employment in the industries of its tradable sector that came under competitive threat. Now, US policymakers must choose, too.”
Spence points out that America has been becoming increasing inequitable as a society. The ratio of the average income of the top 20% of the population to the average income of the bottom 20% is 4 to 1 in Germany, but 8 to 1 in the US. Spence’s conclusion: “. . . tradeoffs between market forces and equity are possible. The US government needs to face up to them.”
And he ends with a powerful quote from Paul Samuelson, a distinguished US economist: “Every good cause is worth some inefficiency,” Samuelson wrote. “Surely, equity and social cohesion are among them,” Spence adds.
Michael Spence, meet Karl Polanyi. The Big Tradeoff, let me introduce you to The Great Transformation.
Alan Webber will be regularly contributing blogs to Good-b.
Category: Sustainable Small-B